The Honest Truth About Venture Capital from Startup to IPO

There is no concept of ethical behavior in the Venture playbook.

Investors only care about returns.

Good VCs know they can't screw the founder upfront: They have to work with them for years after they invest; it would be poisoning the well. But there's always some investor who tries to take advantage of founder naïveté and every founder has heard the stories.

The best way of getting in front of an investor is getting an introduction. Founder intros from within the portfolio are the best, especially if they're from companies doing well.

The narrative must strike fear into the heart of the investor, and then serve up your company as the solution to that terror. Then you introduce some indication that you have traction in some area, present the team as cohesive, and then tell them how much you want. That's it. Competition, market size, product demo—all this should be deferred until the second conversation.

How to craft a deck on words: 1. The world is ending. 2. In the worst possible way it could end. 3. And whatever you think you know about preventing world explosion, you are wrong. 4. Meet The Best Company Ever! 5. We are your savior. 6. We are already on a rocket ship. 7. Here's how the founders look in PowerPoint bubbles, which gives you confidence to wire us money. 8. Here's the money we want. 9. Thank you.

Investors ask for the TAM slide because (1) they need to see a large enough number such that they can validate to their investment team that the space is big enough to place a bet in, (2) they don't want to do that work themselves, and (3) they have to hear directly from the founders as to how they're going to own that number because they need to believe they're investing in founders who want to go all the way to IPO.

Silicon Valley partner meetings are held Monday mornings. If you are invited to a meeting on a Monday morning and it's not labeled, it's a partner meeting.

The startup world humbles the certain, and the more sure of yourself you are, the harder this lesson will be.

Liz’s absolutes of fundraising:

Rule #1: you are more powerful together as co-founders than with a hero CEO

Tag team each call. Someone pitches, someone observes and takes notes and chimes in when something isn’t hitting.

Rule #2: fundraising is your new full-time job

If you're doing it right, there are six to eight calls each day.

You should be exhausted and on the verge of tears because you are pushing that hard to get a term sheet.

Rule #3: never talk to associates

Only partners can say yes.

If you can't hustle well enough to get directly to a partner, that should say something to you about your sales ability.

Rule #4: never send a deck out over email

You, the founder, are a master storyteller. You can only control the narrative live.

If someone won't spend fifteen minutes on the phone with you to hear your story, do you really want them on your cap table?

Rule #5: always pitch with a deck

Rule #6: never do anything without being on video (or in person)

Gently ask them to reschedule if you’re on a call.

Rule #7: make your appearance a nonissue

Rule #8: investor data requests are dumb

Find a way to tell the story you want or don't tell that story at all. If data doesn't serve you, don't provide it. Put information into PDFs, not spreadsheets. Invest time in getting graphs just right; it's a talent and when you see a good graph, the conclusion hits you over the head and you move on.

Rule #9: always answer the question you want to answer

Dig, perceive, try to figure out what the question under the question is, and only then answer. Answer a question with a question until you've figured it out. You can't do your job unless you understand, much like a diplomat.

Rule #10: pre-term sheet diligence (technical or otherwise) can drag you down

Max two pitches, one call with your CTO, a few customer references, and then a partner meeting. If it's anything more than that, something is wrong and the investor is stuck on a point. Identify that point or move on.

Rule #11: there is no such thing as “getting investor feedback.”

If you are talking to an investor, you are raising. I don't care if it's a fifteen minute coffee a year before the raise. You are raising.

They are not your friends. They care about one thing and one thing only and that is their investment return.

Rule #12: disqualify quickly

Very quickly. Or get rejected quickly. Very quickly. I don't care which way it is, but get the breakup over with so you can focus on the ones who matter.

Remember, if a founder's job is to cut through the bullshit and. discover the real reason for a rejection or extra work (a skill that takes time to develop), then a VC's job is to string you along for as long as possible to mitigate their risk of committing capital to a failing business.

Humans do not like to be uncomfortable, and venture capitalists are no exception. To say no and give the real reason why requires being uncomfortable.

When they say they don't believe in the market or that the valuation is too high or that they're not sure the tech is defensible, know that all of that is bogus.

The job of the founder: making the best decision possible with the information available to you at the time.

A fundraise is nothing but a sale.

A founder's job is to get to a yes or no as quickly as possible. Everything else is a waste of time (including spending time with VCs).

Knowledge is power; diligence investors as if your life depends on it.

If you’re relying on the contract to resolve an issue with a founder, you’ve already lost. Go see him and work it out in person.

Lawsuits are expensive, take a long time, and tend to destroy more value than either side stands to gain.

Everything is negotiable, use a term sheet to call other funds, and you’re in control.

The term sheet can never have enough detail.

If an investor pulls a term sheet it can easily kill the company

Almost all VCs insist on buying preferred stock because they will get their money back before founders.

I am personally less concerned about things like information rights. I believe investors should have a right to know what's going on, and if I don't trust them not to speak, I should never have taken their money in the first place.

Don't lose sight of critical things like power just because a sexy valuation number is staring you in the face.

Now, there's also a term that isn't customarily introduced unless the founder asks for it but can be negotiated in. Next to control, it may be the most important term you ask for. It's called a co-sale right, exempt from the ROFR. This gives founders the right to take some money off the table, an agreed-on percent of what they hold, typically in future financings (but sometimes elsewhere).

So negotiate for the highest percent possible. Fifteen percent is outstanding. Don't accept less than 5%. Even if you're at the Seed stage, do it now.

It's fine to agree to maybe re-vest 25% over one year, or even better, keep everything you've already vested and instead demand an option top-up. You're being diluted and continuing to work, so why shouldn't you get re-upped too, just like the option pool? Another point or two, vested ratably across four years, with a one year cliff, is a great win. Then ask for this on every single round.

VCs will ask for a 10.0% or 12.5% unallocated option pool post-closing, sometimes without asking you about hiring plans or even the current number of outstanding options. I've even seen paper go as far as 15.0%. Founders should want the pool to be just big enough to hire people until the next round, because on the first round of funding, it's dilutive to founders and only founders. If the term sheet asks for a 12.5% option pool, but your hiring plans call for only 5.0% of the total cap table to be issued, then there's 7.5 points of padding. You can increase it again in the next round, when it's dilutive to all shareholders.

In later rounds, the founder doesn't pay for all the ancillary investors' fees-only the lead's—so the logic that you're covering everyone's is silly.

Negotiate another common board seat on every fundraise.

If you are two founders, you may be in a standoff because of the 50% split. Think through a fight and consider this one immutable fact: You are better together than apart. Always. Investors will use any excuse to divide and conquer, and there's no better one than a fight.

One document you also must demand if you don't have one: an Employment Contract. It's still at-will employment but this form outlines the scenarios under which you can and cannot be fired, or quit, with or without Good Reason or Cause. As a founder, especially as founder CEO, and definitely if the common isn't in total control of the board, this is key. It can cover severance, COBRA, acceleration of vesting for both founder stock and any options (sin-gle or double trigger), your ability to keep your board seat, reimbursement for legal fees in the case of wrongful termination, or anything else you deem important to ask for. This agreement may save your financial future in the case of a nasty breakup with your VCs or your co-founders. There's no reason not to have it. Run far, far away from any investor who tells you otherwise.

Use experienced startup lawyers.

Sometimes it’s okay for a founder to walk away and turn down a term sheet.

Set a close date 3-4 weeks out and stick to it. Make it a Tuesday, Wednesday, or Thursday

Litigation forms are absolute pit bulls for getting founder-friendly docs.

Read every doc with at least one other co-founder.

Price is not everything. Control is everything.

Negotiating is an art.

Lawyers are in bed with VCs. Find ones who aren’t.

If the founding team isn’t perfectly aligned, control will be lost.

The board of directors is a group of people whose legal and fiduciary obligation is to oversee the company and ensure it serves the best interests of all shareholders.

The CEO’s job in managing the board is recognizing who is who, and figuring out how to deal with each of them.

In a good board meeting, the CEO presents updates on important issues-key business metrics, progress on building the product, hiring, the customer funnel, customer feedback, the balance sheet or income statement-whatever is important at that stage of the company, and shows how the company is trending compared to goals. They highlight any problems or opportunities and talk about what they are doing to fix problems or take advantage of opportu-nities.

Board meetings are not the right place to solve problems.

Create a shadow board of a serial startup COO, a long-standing seed investor, any founder who’s recently been through a later stage than where you are now, co-founders, therapists

The board is there to make the business successful, not the founders.

Fundraising can be a strategic play to suppress competition

Founders have to switch from doing to managing

The job of the startup CEO is to set the vision, raise capital, and hire employees

If we’re acting from emotion instead of from understanding, everybody loses.

Slow down and say, “why is the other person doing this?”

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